Real Estate Investment

1
Real Estate Investment

• Dr. Jim Burton
• Marketing Real Estate
• Richards College of Business

2
Overview

• Advantages of RE Investing
• Disadvantages of Investing
• Projecting Cash Flow
• Simple Return Measures
• Discounted Cash Flow (DCF)
• NPV IRR

3
Advantages of RE Investing

• Rate of Return
• Price Appreciation
• Diversification
• Tax Benefits
• Pride of Ownership
• Leverage asset financial

4
Disadvantages of Investing

• Not Liquid
• Large Capital Outlays
• Can be Risky
• Legally complex
• Financially complex
• Requires knowledge expertise

5
Projecting Cash Flows

• Gross Income (Rents)
• Vacancy Collection Loss
• Effective Gross Income (EGI)
• Operating Expenses
• Net Operating Income (NOI)
• Debt Service
• Before-Tax Cash Flow

6
Simple Return Measures

• Equity Dividend Rate (CF/Equity)
• Price/SF
• Capitalization Rate (OAR)
• Debt Coverage Ratio (DCR) - NOI/DS
• Breakeven Point

7
Discounted Cash Flow

• Forecast income/expenses
• Forecast Debt Service
• Forecast Cash Flow
• Estimate Sales Price
• PV all cash inflows
• After-Tax Cash Flow

8
NPV IRR

• Net Present Value - outflow less present value of
  inflows
• Internal Rate of Return - NPV 0 that rate that
  causes PV of inflows outflow.